On August 29, 2016, the U.S. Court of Appeals for the Ninth Circuit issued a major decision restructuring how common carriers are regulated at the federal level. The Ninth Circuit interpreted Section 5 of the FTC Act, which allows the FTC to enforce unfair or deceptive acts or practices, to contain a status-based exclusion of communications common carriers from all FTC Section 5 regulation, whether engaged in common carrier activities or not. The FTC had sued AT&T Mobility (“AT&T”) for imposing data speed restrictions on its customers who had “unlimited mobile data” contracts. The FTC complaint alleged that this data throttling amounted to unfair and deceptive acts or practices. The FTC’s theory, which the district court accepted in denying AT&T’s motion to dismiss, was that despite the Section 5 common carrier exemption, the FTC had authority over the non-common carrier activities of AT&T Mobility, as it has regulated other non-telecommunications services of common carriers before, such as alleged cramming of non-telecommunications services on customer bills.

Further complicating matters, while AT&T’s motion to dismiss was pending in the district court, the FCC, in its Open Internet Order, reclassified mobile data service as a Title II common carrier service that is regulated by the FCC, raising the issue of how the reclassification would affect FTC jurisdiction over conduct that pre-dated the effective date of the new FCC rules. That quickly became irrelevant under the 9th Circuit’s decision. Rather, the court interpreted the common carrier exemption as a status-based exemption barring all Section 5 regulation of common carriers, regardless of the activity in which they are engaged. Thus the reclassification of mobile broadband as a Title II service and the effective date of those new rules are besides the point. Under the broad sweep of the status-based exemption, AT&T, and any other telecommunications carrier, is “exclude[d]…from section 5’s coverage…even as to non-common carrier activities.” Opinion at 8.

Likely Impact of the Decision

This appellate decision will likely have repercussions on multiple fronts. First, if upheld, it will prevent the FTC from pursuing an enforcement proceeding against AT&T or any other broadband Internet access provider for insufficient disclosure of its alleged throttling of mobile data customers above a certain usage level. But more broadly, the decision bars FTC regulation and oversight of any telecommunications carrier, whether its businesses involve common carrier activities (such as broadband Internet access service under the Open Internet Order) or a non-common carrier activity. This would leave the common carrier solely subject to FCC regulation for its interstate services. However beyond broadband Internet access service, over which the FCC has now asserted common carrier jurisdiction, FCC authority does not extend to the non-carrier businesses that common carriers may own or operate. So this ruling could benefit some telecommunications carriers like Verizon which own non-common carrier online advertising businesses such as Yahoo and AOL, by potentially insulating those previously regulated businesses from FTC oversight. That said, it remains to be seen how the status question will be applied based on the corporate structure of an enterprise, for example where an enterprise that is itself a carrier, has non-carrier separate subsidiaries or affiliates.

The tougher question is whether AT&T Mobility will completely gut FTC regulation of an Internet company or edge provider when, unlike AT&T Mobility, its common carrier business is not a core business activity throughout all business units, but of just one subsidiary, or perhaps a recently acquired entity. For example, Google Fiber’s broadband Internet access services are now Title II common services, but that business represents a fraction of Google’s entire market capitalization. Will all of Google—browser search, digital advertising, YouTube, Gmail, etc.—be exempt from all FTC privacy regulation, as well as FCC regulation, as non-common carrier services? Would another court decide such a case differently than the Ninth Circuit did in AT&T Mobility? Would Congress intervene, as it did in 1958 by enacting the Packers and Stockyards Act to prevent companies from acquiring meat packing companies solely to avoid FTC regulation of all their business activities?

While the decision does not give the FCC any new authority to regulate common carriers then it does not already possess, it does raise the stakes in the FCC’s ongoing litigation of the Open Internet Order, and in its pending rulemaking to adopt broadband privacy rules. If the FCC ultimately is unable to regulate broadband services as a reclassified common carrier offering, many edge providers and public interest groups would be gravely disappointed.

Next steps

While it is uncertain what the FTC will do next, given the importance of the regulatory issues and to ensure there is no regulatory immunity of non-common carrier activities by common carriers, it is likely the FTC will petition for rehearing en banc. If that fails, it could even petition the Supreme Court for certiorari. While the FCC may be pleased that it enjoys sole regulatory authority over common carriers, this decision could trigger some perverse regulatory incentives for larger Internet edge providers to acquire a common carrier to immunize themselves from regulation that might otherwise exist or to fight FTC jurisdiction over their non-common carrier businesses. It also raises the stakes for the FCC in the pending petition for rehearing en banc of the DC Circuit’s Open Internet Order. If the DC Circuit’s Open Internet Order were to be reversed and the Open Internet Order vacated, either by the full DC Circuit or by the Supreme Court, then broadband services, mobile and fixed, offered by traditional telecom carriers such as local phone companies and mobile wireless providers would be free from both FTC regulation under the common carrier exemption and also free from Title II regulation as a telecommunications service. At the same time AT&T Mobility is also still subject to a $100 Million FCC Notice of Apparent Liability for Forfeiture for violations of the 2010 Open Internet Transparency Rule for its alleged data throttling, which remains pending and which it has challenged.

Prognosis

It may take some time—and further appellate review—before companies with non-common carrier Internet operations attempt to immunize those non-common carrier businesses from FTC privacy and other regulation by acquiring a common carrier or restructuring themselves so that non-common carrier activities are part of a common carrier entity to be able to cleanly invoke the common carrier exemption recognized in AT&T Mobility. This, and the criticism of the FCC for pursuing an unlevel playing field by potentially regulating the marketing practices of broadband providers but not edge providers could force Congress to act. For example, post-election, Congress could adopt (a) new privacy rules for the entire Internet ecosystem or (b) eliminate the common carrier exemption (or limit the exemption to common carrier activities only) in Section 5 of the FTC Act to return to the status quo of lighter touch FTC regulation. Broadband providers would likely push for equivalent privacy rules for broadband providers and edge providers, as they have in the FCC’s pending broadband privacy rulemaking, which would mean yet another bitter policy fight between industry segments.